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Forget Shale; Watch the Wash

Here's another tantalizing horizontal drilling target.

Back in March of 2008, Chesapeake Energy(NYSE:CHK)unveiled its monster Haynesville shale play, with CEO Aubrey McClendon dubbing the press release "the most important operational announcement in Chesapeake's 19-year history." Two other plays -- the Colony Granite Wash and the Mountain Front Granite Wash -- were introduced that day, but they didn't exactly share the spotlight.

In Chesapeake's second-quarter 2009 operational update, the company identified its Colony Granite Wash and Texas Panhandle Granite Wash plays as "the two highest rate-of-return plays in the company." In the third-quarter report, the company estimated the Colony's internal rate of return at 141%, based on selling the natural gas at $7 and the oil at $70. Chesapeake also spoke excitedly about its wash plays at the annual investor day, and began talking about its "Big 4 plus 1," putting its Greater Wash plays on the same pedestal as the treasured shale plays that European giants BP(NYSE:BP), Statoil, and Total have so eagerly farmed into.

Despite all this promotion by Chesapeake, the buzz surrounding these plays remained pretty minimal. After almost two years, it seems that wash plays are finally beginning to elicit major enthusiasm.

It's hard not to be excited about these wells, based on Forest Oil's (NYSE:FST) latest results. The company just announced its latest two Texas Panhandle wash wells, both of which produced at very large initial 24-hour rates. I won't repeat the numbers, because I don't support the industry practice of hyping rates that are known to decline sharply and immediately. Suffice it to say that they beat the eye-popping Haynesville shale results reported by Devon Energy(NYSE:DVN) in November.

The economics of the wash plays do not lie solely in their productivity. These wells, drilled horizontally through tight rock, have a strong liquids component, which makes them more valuable than a straight gas well. By liquids, I mean crude oil, condensate, and natural gas liquids (NGLs) like butane -- all of which are tied more closely to oil prices than natural gas prices. Some wash wells, like Newfield Exploration's (NYSE:NFX) McCoy 27-8H, initially kick out more than 1,000 barrels of NGLs per day. Penn Virginia(NYSE:PVA) says that some even produce more than 1,000 barrels of oil daily.

As noted in my Chesapeake analyst day roundup, that company's the dominant leaseholder in the granite wash. Cimarex Energy(NYSE:XEC) was a distant second, last I checked. That's a fine operator with a prudent approach to the exploration and production business. Cimarex would probably be the way I'd want to gain exposure to the wash phenomenon, but let's open it up to the floor and see which one Fools like best.